While there is still debate on whether occasional fast food can be part of a balanced diet, these concerns don’t tend to bother traders when looking for opportunities in stock like McDonalds (MCD).
McDonalds had been trading in a range of approximately $85-100 for most of the last three years. The last earnings (released 10/22/2015) and the outlook seem to have been well received as the stock broke out to the upside and has been in trending up since then
Looking at the weekly chart, we can see that the stock is in an uptrend with a good moving average geometry (upward fanning pattern and good separation of the different periods). Price is a bit overextended from equilibrium levels indicated by the 10 and 20 period moving averages, a zone that we like to wait for price to return to before looking for opportunities to join the trend. . The last candle looks rather bearish and could be the start of a retracement that might fix this over extension.
Looking at the daily chart, price has pulled back into the buy zone on this timeframe. Both MACD and RSI don’t show any major divergence versus most recent highs – so no big warning signs, that this move up might be coming to an end soon. As McDonalds is trading near all-time highs, there is no resistance level in the way of a continued move higher.
The setup I’m looking for is a buying opportunity at slightly lower price levels. If we get a small bullish candle near the lower end of the buy zone on the daily chart in the next few days, this should be just enough to fix the overextension on the weekly chart. If this overextension remains, meaning the price does not pull back to the weekly 10 period moving average, I’m no longer interested in this specific setup.
Before considering a bullish position in McDonalds we should reflect on the following aspects as well: if you are not bullish on the overall US stock market, a long position might not be the perfect fit for your portfolio. Another aspect to think about is the next earnings announcement, which will take place on 25th Jan 2016. We traders generally don’t want to increase our risk of gaps by holding positions in any market with imminent news events, and McDonalds is no exception to the rule. If I get the setup I’m looking for, I will definitely close my position before earnings.
As always: you have to decide if this setup meets your criteria for a potential trading opportunity. Or to align with McDonalds slogan: are you loving it?
Best wishes for 2016 and happy trading!
By Philipp Pfitzenmaier from Trade With Precision